MarketWatch First Take: Zuckerberg and investors both win in split quit, thanks to Wall Street love of Facebook

Mark Zuckerberg and Facebook Inc. investors got exactly what they wanted Friday with the surprise news that the company dropped its controversial shareholder plan, thanks to Wall Street’s love of Facebook stock.

Facebook FB, -0.33% shares slipped slightly in after-hours, after the news that the company was withdrawing its plan to create a third class of nonvoting stock that would have cemented co-founder and Chief Executive Zuckerberg’s control. Facebook first announced the plan, called “Preserving Founder Led Structure to Focus on the Long Term,” in April 2016 to allow Zuckerberg to sell big chunks of his stock for his philanthropic efforts without gradually losing control of the company.

Read also: Facebook keeps warning about growth, but growth doesn’t stop

Investors sued to stop the plan, but also pushed the price high enough that it was no longer necessary. Zuckerberg, in a Facebook post, said that because Facebook’s share price has increased so much in the last year, he can still sell off enough shares and maintain control of the company without having to create a nonvoting class of stock.

“Facebook’s business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more,” Zuckerberg wrote.

Facebook shares have jumped 48.2% so far this year, pushing the company’s market valuation near $500 billion, as the S&P 500 index has added 11.7%. Analysts have gone ga-ga for the stock along with investors, with 41 of 45 analysts tracked by FactSet rating the company the equivalent of a buy.

Facebook dropped the suit just days before Zuckerberg would have been scheduled to take the stand in the case shareholders had filed against the company. The trial was set to begin in Delaware Chancery Court on Monday and Zuckerberg was expected to take the stand on Tuesday.

“I tend to think it was the eve of trial he was a bit uncomfortable about having to be on the stand and having to explain some difficult questions,” said Stuart Grant, managing director of Grant & Eisenhofer, which represented several institutional investors in the lawsuit against Facebook.

“They probably evaluated their legal position. They did the right thing and just pulled the reclassification. We had nothing to do with that,” he said in an interview Friday.

Grant said Facebook’s board met Thursday and called him late Thursday night with the decision. He called the court Friday morning to cancel the trial.

See: Facebook plans changes after Russian political ad purchases

Zuckerberg was clearly going to face some questioning about the role that his friend, adviser and Facebook board member, Silicon Valley venture capitalist Marc Andreessen, played in getting this stock plan approved. According to court documents, Andreessen was texting Zuckerberg the reactions of his fellow committee members and guiding him, as Zuckerberg made a pitch via conference call on the proposal to create an additional class of Facebook stock. The suit alleged these actions by a Facebook board member “severely compromised” the committee process.

“This was a self-dealing transaction, designed to favor Mark and Priscilla, with no benefit to the average shareholder in Facebook,” said Stephen Diamond, associate professor of law at Santa Clara University School of Law. “People voting didn’t now about Andreessen’s role. Had they known about that, it borders on securities fraud to have people voting without telling them that a director is playing a dual role.”

Facebook’s stock plan was a copycat move of what Alphabet Inc.’s GOOG, -0.42% GOOGL, -0.45%  did to ensure the control of its co-founders, Larry Page and Sergey Brin, with a new stock split plan that created a new class of shares. And Facebook, like Alphabet, was sued by investors. But Alphabet settled its lawsuit also on the eve of trial in Delaware Chancery Court and maintained its third class of nonvoting shares.

Whether this switch by Facebook will have a wider impact on the founder-obsessed culture of Silicon Valley is still a big question. The attorneys involved in the case are hopeful.

Don’t miss: Snap backlash, Facebook capitulation won’t stop multi-class stock structures

“The company will be better because of this,” Grant said, but added that he believes founder-friendly stock structures will continue. “I think if people want to do it, they are going to have to do it before they go public.”

Diamond is more hopeful that the cave-in by Zuckerberg will send a clear message to Silicon Valley.

“This whole game of trying to maintain control is just not tenable if you are going to be a public company,” he said. “This case will potentially call a halt to future efforts along these lines, along with the Snap SNAP, -0.51%  [IPO] experience. There clearly has been push back and this withdrawal by Zuckerberg will likely reinforce that, and certainly gives ammunition to the corporate governance community to return to normalcy in corporate governance.”

That may be wishful thinking, but it’s a good message for Silicon Valley’s power players to remember.

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